Falling interest rates: What you need to know

What is the federal funds rate?

The Federal Reserve sets the federal funds rate, which is the interest rate applied when banking institutions borrow and lend money to each other. Lowering the federal funds rate makes it less expensive for banks to borrow money from each other, helping stimulate the economy and lower rates more broadly. 

Read more: Take our quiz to find the right investment account for you.

How falling interest rates impact . . .

The stock market

The cost of bonds

Bonds become more expensive as interest rates drop. So if you have bonds you purchased at a low cost when interest rates were high, a move to lower interest rates could mean good news, if you’re ready to sell.

Your money

Lower interest rates often push banks to adjust the rates they provide for their customers. You might see your APR lower , which is good news for anyone with credit card debt . But if you’re earning interest on money in a savings account or planning to open a new  Certificate of Deposit  (CD), those funds will likely have a lower APY after rates fall. That doesn’t mean you need to move your money, though. Use our interest calculator to evaluate how much you might be earning after APY rates adjust and determine the right move for your financial goals. 

Note: Any existing CDs you have will retain the rate you locked in until they reach maturity.

Your investments

With any fluctuating market, changes to interest rates will have some effect on your unique investment portfolio. Maintaining a diverse portfolio can help you offset the effects of these financial changes. 

Your retirement

If your retirement funds  are in a 401(k) or IRA and invested in the market, their performance will be tied to how well your specific retirement investments are doing. You might see a spike when rate cuts are announced, but remember these investments are for the long haul and will see many ups and downs in their lifespan, so keep your timeline in mind when you see movement.

What you could do when interest rates go down

There’s no need to jump into any financial decisions when interest rates change, but there are some choices you can consider.

1. When your bank decreases the interest rate on your credit card balance, you have an opportunity to apply the money you’re saving on interest toward your balance. Focus on paying off high-interest cards while rates are low to help you eliminate your credit card debt.

2. Many potential homebuyers are awaiting the opportunity to purchase property with lower mortgage interest rates . But if there's uncertainty surrounding when cuts will happen, assess your overall financial readiness for a home purchase and consider buying when the right home comes on the market. The ability to refinance will still be available (pending your lender's approval process) if rates fall, and you’ll already have secured your dream home. 

3. When it comes to investing during periods of economic change, consider an automated investment portfolio (through Ally Invest, for instance). A robo advisor can make adjustments that are appropriate for the current market environment, easing the need for spur-of-the-moment money decisions. 

The bottom line on lower rates

The Fed’s decisions on interest rates can be hard to predict, but it’s good to be prepared with knowledge of what these changes mean. Instead of trying to perfectly time the market, focus on your financial goals and how any potential rate changes will affect your plans.